News from Barron's this weekend...my calls are looking frigging awesome!!! However, note the caveat with respect to the liquidation of Teleclone.
Paulie
Bell Canada's parent, BCE, has risen 84% this year to 69 13/16, but some think the stock still has substantial appreciation potential because the company trades for little more than the value of its big stake in Nortel Networks, the hot telecommunications equipment company whose shares have more than tripled in 1999.
"BCE is the cheapest telecom play in the world," argues Alec Cutler, a managing director at Brandywine Asset Management. He says BCE is worth over $100 per share. (BCE's stock is traded both on the New York Stock Exchange and in Toronto. Except as noted, all figures here are in U.S. dollars.) BCE, a telecom conglomerate, owns a 40% stake in Nortel that's now worth about $44 billion, or $68 per BCE share (each BCE share effectively controls 0.84 Nortel shares). BCE has substantial nonNortel assets, including an 80% interest in Bell Canada, Canada's leading phone company; BCE Mobile, a major Canadian wireless company; stakes in various public companies, including Teleglobe and CGI Group, as well as $5 per share in net cash. BCE also is the biggest Internet service provider in Canada.
The Dow Industrials rose above 11,000 last week, gaining 234 points to 11,008. While the Nasdaq and S&P set new highs last week, the Dow remains more than 300 points below its August peak of 11,326. The index is up 19.9% in 1999.
Cutler says BCE's asset value could be unlocked because the company's well-regarded chief executive, Jean Monty, is upset that BCE hasn't kept pace with the soaring value of its Nortel stake. BCE rose 3 5/16 last week to a record 69 13/16, while Nortel gained 8 11/16 to 81 1/4, also a record.
On a conference call with institutional investors last month, Monty said he would consider a possible spinoff of Nortel if BCE continues to trade at a steep discount to its asset value. Cutler and some analysts believe BCE could accomplish such a spinoff on a tax-free basis under complex Canadian law. "It generally pays to invest in companies trading at large discounts to their asset values [and] that have skilled and frustrated management," Cutler says.
Nortel has soared this year because it has a strong position in one of technology's hottest sectors, optical networking products, which enhance the capacity of fiber networks. Nortel, as noted above, is no cheap stock, trading at over 80 times earnings. Nortel is now the largest company in the Canadian stock market, with a market value of over $100 billion. BCE ranks second.
At the start of the year, BCE traded for 35 and its Nortel stake was worth around 21 per share, valuing its non-Nortel business at about 14. But the gap has steadily shrunk to less than $2, given the soaring value of Nortel.
The more rapid appreciation in Nortel has stung some arbitrageurs who had bought BCE and shorted Nortel to synthetically create BCE's non-Nortel assets.
Indeed, one publicly traded vehicle that permitted ordinary investors to participate in this arb trade, TeleClone, a Canadian company, faces liquidation this week because of a margin call on its short position. TeleClone says it lacks collateral to meet the call. It finished Friday at $1.75 Canadian, down over C$20 since the start of the year. When TeleClone was formed last year, its backers figured the risk was minimal that BCE's non-Nortel assets could drop toward zero in the market. Yet that unlikely scenario has unfolded.
Should TeleClone be liquidated, BCE could briefly come under pressure and Nortel appreciate because the trust holds about seven million BCE shares and is short over five million Nortel shares.
BCE carries risk at current prices because of Nortel's lofty valuation. Should Nortel drop, BCE might still rise if the BCE moves to unlock its valuable holdings or if investors accord a higher valuation to BCE's non-Nortel assets. At minimum, BCE appears to be a better bet than Nortel at current prices. |
